The other defining social issues of 2020 – the Black Lives Matter Movement and climate change – have also confirmed the need for a well-articulated purpose, while also testing insurers’ willingness to deliver on it. Racial justice demonstrations worldwide, coming in the midst of lockdown, triggered bold statements by business leaders about the pressing need to end racial injustice. The insurance industry certainly made its voice heard. The COVID-19 pandemic has converged with diversity and inclusion initiatives, thanks to the growing body of evidence that women and minorities are disproportionately impacted.
Another intense hurricane season and massive wildfires in Australia and California once again commanded the attention of boards and senior executives. According to Swiss Re (pdf), the impacts and risks of climate change – including approximately £219bn in insured climate-related losses globally in 2017 and 2018 – are too great to ignore. Climate change is at the top of board agendas – and will remain there – thanks to the economic impacts, the prominent statements by key government leaders and new regulation soon to take effect. In March 2021, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) will require companies in Europe to report more detailed information regarding climate change. More regulation is certainly on the way.
The thinking around climate change is evolving rapidly and expanding beyond the regulatory realm, with more balanced consideration of upside opportunities and downside risks. Many industries face a difficult transition to a low-carbon economy, which itself represents a significant commercial and societal opportunity. Indeed, Mark Carney, former head of the Bank of England and now a US Special UN Envoy, has called the shift to a greener economy, “the greatest commercial opportunity of our age.” Others have likened the scale and scope of opportunity to the industrial revolution. The International Energy Agency projects the need for $3.5 trillion in annual global investments to build the infrastructure. Alongside their peers in financial services, insurers have an important purpose-led role to play in facilitating this transition, not least in their leadership relative to ESG.
As these issues and forces have converged, senior leaders have been forced to recalibrate priorities and budgets to accommodate the urgency and complexity of the required decisions. It’s a tricky landscape to navigate. Day-to-day “fire-fighting” has been the norm in the face of market volatility, fluid claims volumes and uncertain prospects for further legislation and government intervention. The approach to the COVID-19 pandemic has been largely federated; the most impacted functions and operations address issues as they come in (e.g., claims spikes, capital management pressures, new risks for underwriting). Managing the safety and well-being of employees and securing corporate networks and assets have been the other (wholly understandable) priorities.
The first year of the COVID-19 pandemic has taught that large-scale, ongoing and repeated business disruption is possible, as are widespread economic lockdowns and the temporary shuttering of entire sectors. Most leaders have been focused on delivering the best numbers they can, managing shareholder and analyst expectations, and navigating the difficult operating environment. Most insurers have managed their responses very well. In fact, a recent analyst report from a global bank cited the “perception gap” among investors, consumers and the insurance industry; because of the singular focus on business interruption disputes, insurers have not received the credit they deserve for all the good they have done during the pandemic.
The second wave of infections and the return of lockdowns may keep some leaders in a reactive posture, even as vaccines become available. However, there is growing consensus around the need to take a more strategic and long-term view, largely because such a perspective is necessary to act on the considerable opportunities on the horizon. From the top-down view, boards and senior management are reviewing actions to date to understand just how well insurers have lived their purpose, while those on the front lines of the business continue to make rapid adjustments based on shifting customer needs.
Some insurers have actively embraced their purpose, emphasizing in earnings calls and public communications how they’ve used their purpose as a compass or lodestar guiding their pandemic actions and informing their long-term strategies, especially relative to ESG. Other insurers seem less convinced of the role of purpose, with the most sceptical viewing statements on climate change and social justice as mere rhetoric.
The bottom line: seizing the moment to demonstrate the industry’s critical importance to society and the global economy
During its long history, the insurance industry has shown remarkable resilience and a unique ability to help society overcome great losses and understand new and complex risks, from natural disasters to terrorism. But the global scale and scope of the COVID-19 pandemic, climate change and other social issues require a much faster and more coordinated response. Insurers can’t go it alone, either in paying for claims or defending their critical societal and macroeconomic role. The convergence of the COVID-19 pandemic, climate change and social issues may represent the greatest test the industry has faced.
The past also confirms that those insurers that commit effectively to strategic change during and after a crisis tend to emerge as winners. Such future success requires that senior executives and boards objectively evaluate their purpose and its link to business strategies and operational realities. The key challenge is whether companies are ready – and able – to live their purpose in good times and bad. That the industry has not received the credit it deserves for its pandemic response only confirms the need to embrace purpose as a strategic compass and ensure that an increasingly broad set of stakeholders – markets, investors, consumers, governments and regulators – understand both why insurers exist and how they live that purpose.